Mexico: Trump Weakens Fragile Economy

A sober assessment of the economic impact on Mexico of the promises and policies of the new US President.

by:

Gavin O'Toole

If the immigration agenda of Donald Trump and his administration is not enough of a racist assault on the human rights of Mexicans, the overall impact of this demagogue’s agenda on the economy of its long-suffering southern neighbour adds insult to injury.

The immediate effect of Trump’s victory and first 100 days in power has been to weaken an already fragile economy: it has hammered the peso, fuelling inflation and pushing up interest rates, thereby halving most forecasts for GDP growth in 2017 and placing even greater pressure on tight public finances that have prolonged painful austerity policies.

Warnings of an economic earthquake in Mexico have been sounded since Trump’s campaign in which he pledged to rip up the North American Free Trade Agreement (NAFTA) and impose a 35% “border adjustment tax” on Mexican goods.

Slapping tariffs on imports will hit Mexico badly: its economy depends on mutual trade worth $350bn a year and more than 80% of its exports head north. Since 1994, when NAFTA removed trade barriers between the two countries, Mexican exports to the US have quadrupled and it has become the world’s fourth-largest car exporter, with its auto sector employing about 900,000 workers.

Investment dented

Although Trump’s policies remain in formation, he has already dented investment by fulminating against US companies that “send jobs” to Mexico where wages are cheaper. In January he threatened GM by telling it to move production of its Chevy Cruze from Mexico to the US or face tariffs, and under pressure Ford withdrew plans for a $1.6bn plant in the country saying it would invest $700m in Michigan instead.

Free trade and cheap labour has turned Mexico into one of Latin America’s largest recipients of foreign direct investment, receiving in 2016 alone $26.7bn in FDI, about three quarters of which was from the US. The Mexican bank Banamex has now cut its projections for total FDI in 2017 by 30% to $25bn and Bank of America has predicted a fall of 35%.

Economists say Trump’s behaviour is short-sighted because decades of free trade have left all three North American economies intimately interconnected – but this is likely to cut little ice with the US president.

Declining exports to the US would hit Mexico’s growth badly: the country was forecast to have a bad year anyway in 2017 and the Trump effect has meant growth estimates have mostly been revised down for this year to between 1.9 and 1.25%. Some economists have even warned that the Trump agenda could slash Mexico’s GDP by up to 4.9% and push it into a recession similar to the devastating 1994 “Tequila Effect” caused by the collapse of the peso.

Currency traders have responded to uncertainty by selling the peso, which started falling as soon as Trump began to rise in the polls in May 2016. The Mexican currency ended last year 20% down in its worst performance since the financial crisis, and in January fell to a record low of 21.61 to the dollar following Trump’s threats against companies that move south.

A weakened peso is putting pressure on inflation, which rose to an eight-year high in April, tightening already strained public finances and further pressing the central bank to maintain the interest rate at 6.5%, also its highest level since 2009. Employment growth is sluggish and could get worse: if Trump scraps NAFTA some estimates suggest this could have a knock on effect on up to 7 to 10 million jobs in Mexico.
Migration

But Trump’s most disturbing agenda concerns immigration. He has threatened to deport an estimated 11 million “undocumented” immigrants, up to 5.5 million of whom are believed to be Mexicans, and has proposed slapping a tax on the remittances these workers send home from the US to pay for his pet project to build a wall the length of the 1,989-mile border – a signature campaign promise that has turned into a symbol of his credibility.

Trump has pushed ahead with his immigration crackdown through a string of executive orders that beef up the US border forces, give officials sweeping discretionary powers to target migrants, deputise local police forces to enforce immigration laws, and scrap an array of legal and jurisdictional obstacles to deportation that are vilified by rightwing Republicans.

It goes without saying that his programme is based on half truths and xenophobia. Mexican immigration to US has been in reverse since the 2007–08 financial crisis and there has been a dramatic decline in the US undocumented population since 2008. A wall would not address the reality of how the large majority of people become “undocumented” – many are simply people who have overstayed their visas – and the myths about migrants peddled by Trump are very different to the reality anyway. Research shows clearly that immigrants are more law-abiding than non-immigrants; three-quarters of a million undocumented residents are self-employed, having created their own jobs (and often jobs for Americans); and 13% of the undocumented aged over 18 have college degrees.

Moreover, the likely effectiveness of a wall is fiercely disputed – an existing “wall’ extending 654-miles on the western stretches of the border erected since 2006 was breached 9,287 times between 2010 and 2015. Last but not least, most Americans (62%) oppose building it.

The barrier to building a wall that is proving hardest for Trump to surmount is its cost – put at $21.6bn over four years by the Department of Homeland Security itself – and how this will be paid for. On the campaign trail Trump insisted that he would make Mexico pay, and use existing ant-terrorism legislation to block or tax remittances to the country unless it coughed up $5bn–$10bn for that purpose. The proposed level of this tax has wavered between 2% and 5% – but the Cato Institute has calculated that a tax is unlikely to raise enough to have a meaningful impact on financing anyway.

As some commentators predicted, the wall is proving to be a hostage to fortune. Trump’s dash to expedite a campaign promise essential to his diminishing credibility saw him rapidly fall back on a recognition that the US taxpayer will “initially” have to foot the bill. With both Democrats and Republicans resisting the inclusion of any funds to kickstart the project in budget negotiations that coincided with the president’s 100th day in office, Trump has already been forced into a humiliating retreat and the wall remains on hold.

However, that has not prevented this reality TV star from undertaking the easy PR elements of his plan – organising a “beauty contest” among companies bidding to design and build his wall. Yet even this was revealing, and noticeably absent from the contest have been the giant construction companies that have the most realistic capacity to carry out such a huge project – reinforcing doubts as to whether the wall will in fact ever be built. The nervousness of the construction giants is borne out by a growing civil society backlash against the wall proposal, with Democrats in California, New York, Illinois and Arizona among other states aiming to scare off potential bidders with threats of blacklists and divestment.

Blow to Remittances

In Mexico, the immediate pain of Trump’s agenda is likely to be felt by households that depend on remittances – every month Mexicans in the US send about $2bn home to their families and blocking or taxing that will affect more than 6 million people, 60% of whom live in the countryside. Economists at Colmex and the Centro de Investigación y Estudios Superiores en Antropología Social (CIESAS) say Mexico’s welfare system is not geared up to pick up the slack if remittances are suddenly cut. In March, Bank of America warned that a tax could be the factor that pushes Mexico into recession: remittances are a crucial source of foreign exchange earnings in Mexico, surpassing revenue from oil in 2015.Fishermen on Lake Pátzcuaro, Michoacán, which, along with Jalisco and Guanajuato, is the source of most migration to the US. Photo: Georgina Jiménez

Obstructing remittances, in turn, will only add to political instability in a country with a worsening economy, plagued by weak institutions and violence, that is preparing for divisive elections in 2018. Emigration can be seen as a political safety valve, by mitigating the pressures of unemployment, which is artificially low in Mexico (at about 4.2%) largely as a result. Some estimates suggest that if the US pursues a rigorous policy of deportation, the Mexican unemployment rate could suddenly skyrocket to about 13%.

There are already signs that Trump’s agenda is affecting remittance flows, which in 2016 reached a record $26.9bn, an 8.8% increase on the previous year according to Banco de México. In November alone, nearly $2.4bn was sent home, the most Mexicans have sent back in a single month in 10 years. Although they are not always sent according to fixed monthly patterns, figures suggest the average remittance is about $294.

The increase in late 2016 may be due to fears that Trump will seek to impose restrictions or a tax, and interviews with Mexicans in the US seem to confirm this. Banking experts suggest that in 2016 an extra $420m was sent by Mexicans as a precautionary measure, although the increase may equally be due to the depreciation of the peso which meant that in 2016 households received about 31% more in peso terms than in 2015. However, remittance flows have now slowed, falling in February for the first time in a year, and most economists expect them to continue falling.

This income from the US is crucial for many households, particularly in the states of Michoacán, Jalisco and Guanajuato which are the sources of most migration to the US and together receive about a third of all remittances.

While establishing how families spend remittances is complex, research confirms that they help to reduce poverty. Remittances alleviate the pressures of unemployment and lack of opportunities, and cushion households from income shocks caused by job loss, crop failure or a health crisis. Moreover, remittances are often not dedicated solely to household “current” consumption but are important for improving longer-term factors of security for many poor Mexicans by supporting investment in physical capital such as housing. About 6 out of each 10 pesos received may be spent on household bills with the remainder invested or used to provide access to healthcare for individuals who do not have formal employment-based insurance programmes. Remittances have become increasingly important for the construction of homes in the countryside. Mexico’s Consejo Nacional de Vivienda Verde Sustentable (Convives) has calculated that of the remittances received in 2016, 10% was used to improve or build houses.

Uncertainty caused by Trump’s promises has contributed to deteriorating Mexican consumer and investment sentiment since the start of the year, although the economy has been more resilient than expected and the weaker peso has at least helped exports.

The Mexican government’s response has been shaped by its limited options after 20 years of economic integration: Mexico will only damage itself further by matching new US border tariffs, although it does have some leverage over US maize imports that will worry the powerful US farming lobby.
So far Los Pinos has relied on rhetorical weapons to counter Trump’s threats – but it has notably only gone on the attack when the US president has appeared weak, as happened recently when he suffered a setback on shoe-horning the wall into the budget. President Enrique Peña Nieto – whose unpopularity was made worse by his apparent failure to confront Trump – together with his finance (and now foreign) minister Luis Videgaray have insisted repeatedly that the country won’t pay for the wall, and Mexico’s congress has voiced angry if predictable declarations.

The Mexican government has opened legal assistance centres at its 50 consulates in the US to provide nationals with basic legal advice and has warned off companies from competing for wall projects. The new finance minister, José Antonio Meade, has made a number of announcements pledging to protect migrants’ money, and a consumer watchdog, the Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros (Condusef), says planning is under way to safeguard remittances by making transactions cost-free to minimise the impact of any tax. The finance and foreign ministries are reported to have been working with the Asociación de Bancos de México (ABM) to allow people to open internet accounts with no transfer cost when moving money to Mexico. Mexico’s pensions authority, the Comisión Nacional de Ahorro para el Retiro (Consar) announced that it had created a savings plan for people who send remittances from the US allowing them to deposit their money via cellphone into a savings account administered by a family member. Other Mexican commentators say a simple way for migrants to get round a tax might be to ask a trusted friend who is “legal” to send the money home for them. At a sub-national level, the government of Mexico City has launched a programme to find jobs for migrants deported from the US and to give them a basic welfare payment.

The Left may benefit

It is likely that the Trump effect will also strengthen the chances in the 2018 elections of the leftwing presidential hopeful Andrés Manuel López Obrador (“AMLO”), who has been grandstanding to exploit anger at Trump’s plans by lodging a complaint with the OAS about violations of Mexican rights and unveiling proposals to revive a “free zone” along the border to generate jobs and soak up migrants.

Outside politics, other bodies have also been vocal critics of the Trump plans. Consumer groups and NGOs have launched a joint campaign, ¡Consumidores al grito de guerra!, encouraging citizens to buy only Mexican products. The Catholic church has also waded in, with the archdiocese of Mexico warning that companies tempted to compete for wall-related contracts would be considered “immoral” and “traitors”. The Conferencia del Episcopado Mexicano launched a campaign to encourage Mexicans to support migrants and the Instituto Mexicano de Doctrina Social Cristiana went on the attack against Trump’s agenda.
But Mexico’s options remain limited, and perhaps its only hope that Trump’s agenda can be modified resides in the common sense of Americans themselves – not least because of the hidden social and economic costs that his plans could incur for the US itself.

Losing so many migrant workers will hit the US economy and could push down GDP – by some estimates up to 1.4% in the first year, reducing it cumulatively by as much as $4.7 trillion over 10 years. Undocumented migrants are also crucial to the profitability of US agriculture, which employs at least 1 million of them, making it highly likely that the response to fewer unauthorised newcomers will simply be the introduction of new guest worker programmes.
Research by Robert Warren and Donald Kerwin suggests that deportations will also impoverish many of the 3.3 million mixed-status households where a US citizen is partnered with an undocumented migrant, with a consequent adverse impact upon the 6.6 million US-born citizens (mostly children under 18) that share these households. Removing undocumented residents from mixed-status households would plunge many of these families into poverty, and potentially incur costs to the state of raising the children of deported migrants of $118bn. Mass deportations could also revive bad memories of the US sub-prime loan crisis: a high per­centage of the 2.4 million mortgages held by households with undocu­mented immigrants would be at risk, threatening the fragile US housing market.

Ironically, taxing remittances could also hurt large US multinationals that have taken advantage of NAFTA to expand in Mexico as symbols of the “American way of life” that so many migrants aspire to, such as the iconic Walmart – which noted that an increase of 11.8% in revenue in the final quarter of 2016 was helped in large part by the increase in remittances from Mexicans in the US.

This article was written by one of LAB's Latin Ameriac experts, For more great articles go to www.lab.org.uk

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